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iShares MSCI Emerging Mkts Mltfctr ETF EMGF Sustainability

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Sustainability Analysis

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Sustainable Summary

iShares MSCI Emerging Mkts Mltfctr ETF is likely to concern sustainability-focused investors given certain substandard ESG attributes.

This fund has the second-lowest Morningstar Sustainability Rating of 2 globes, indicating it holds securities with relatively high ESG risk compared to that of its peers in the Global Emerging Markets Equity category. Investors concerned about ESG risk may be better off with funds in the category that receive 4 or 5 globes as they tend to hold securities less exposed to ESG risk. ESG risk provides investors with a signal that reflects to what degree their investments are exposed to risks related to material ESG issues, such as climate change and inequalities, that are not sufficiently managed. ESG risk differs from impact, which is about seeking positive environmental and social outcomes.

One potential issue for a sustainability-focused investor is that iShares MSCI Emerging Mkts Mltfctr ETF doesn’t have an ESG-focused mandate. A fund with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. Currently, the fund has 15.70% involvement in fossil fuels, which is higher than 7.58% for the average peer in its category. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. The fund exhibits relatively high exposure (9.62%) to companies with high or severe controversies. Companies with high or severe controversies may be involved in incidents such as corruption, employee abuses, environmental incidents, and corporate scandals that pose serious business risks to the company.

iShares MSCI Emerging Mkts Mltfctr ETF's asset-weighted Carbon Risk Score of 15.40 is at the lower end of the medium carbon risk band. This suggests the fund’s investee companies are adequately positioned to transition to a low-carbon economy. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. Such funds invest in companies that tend to operate in sectors less exposed to the transition (such as healthcare and IT) and/or companies in more carbon-intensive sectors (such as industrials and utilities) but that consider climate change in their business strategy and products, and therefore are positively aligned with the transition.

ESG Commitment Level Asset Manager

 | Basic

BlackRock’s efforts to build out topnotch resources and integrate ESG considerations in most parts of its business is impressive, but its sheer size and asset mix hamper its ability to fully embrace a culture of sustainable investing. The firm earns a Morningstar ESG Commitment Level of Basic. In January 2020, CEO Larry Fink made a high-profile declaration that sustainability would become BlackRock’s standard for investing, and this kick-started the firm’s ESG efforts. Since then, the firm has ramped up its integration of ESG criteria to include nearly all actively managed strategies (roughly one third of the firm’s assets) and rolled out fund-level ESG disclosures for all funds. BlackRock has also rolled out dozens of ESG-focused product offerings in recent years. However, both in terms of assets and volume, strategies that cater to sustainability-focused investors continue to be dwarfed by those that don’t (accounting for 4% versus 60% of assets, respectively). Despite being the world’s largest asset manager, BlackRock’s ability to push for improvement on ESG issues at investee companies seems limited. Fear of accusations of anticompetitive behavior means the firm is reluctant to file or co-file shareholder resolutions or join onto collaborative engagements. More recently, BlackRock has found itself at the center of anti-ESG sentiment in the United States, making the manager hesitant to promote a strong sustainability agenda, as evidenced by its latest voting record. BlackRock backed only half of key ESG resolutions in 2022, down from 72% in 2021, although still up from 16% in 2020. On climate-specific proposals, BlackRock’s support also waned in 2022, judging them too prescriptive. But changes are afoot to give shareholders a bigger voice in the conversation. In 2021, BlackRock rolled out a pass-through proxy-voting program it calls “Voting Choice,” which allows clients to choose a proxy-voting policy that reflects their individual priorities, effectively empowering investors to vote their own proxies. This option is not yet available to all shareholders, but it is a suitable workaround for those clients who can leverage it. BlackRock’s size gives it an edge over peers, particularly in its ability to process massive volumes of ESG data and translate it into meaningful investment insights. Still, the firm restructured its central sustainable-investing team in October 2022. Some functions, including sustainability research and ESG monitoring, moved into the broader BlackRock Investment Institute, and other functions such as client engagement remain in the renamed Sustainable Transition Solutions unit. The reorganization makes sense in principle, but it will take time for the team to harness new synergies and settle into new roles. The group hasn’t been immune to turnover either. Roughly 30 sustainability-focused professionals (of a team of 70) left the firm since the beginning of 2019, although their roles were quickly backfilled. When it comes to driving outcomes for sustainability-focused investors, BlackRock’s size is in many ways its biggest strength and its biggest weakness, but bright spots remain.